Triumph Group Inc (TGI) 2005 Q1 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2005 first quarter earnings performance. You are currently in a listen-only mode. There will be a question-and -answer session following the introductory comments by Management. On behalf of the Company, I would now like to read the following statement.

Certain statements on this call constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph Group's actual results, performance or achievements to those of the industry in which the Company operates to be materially different from executed future results, performance or achievements expressed or implied in these forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note: this call is property of Triumph Group, Incorporated, and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time I would like to introduce Richard Ill, the Company's President and Chief Executive Officer, and John Bartholdson, Chief Financial Officer be and Senior Vice President of Triumph Group, Incorporated. Go ahead, Mr. Barholdson.

Good morning, everyone. I would like to start out by reviewing the quantitative numbers in the press release, adding some more quantitative information for you before Rick provides an overview of the quarter.

Turning to the income statement first, from continuing operations we generated $165.4 million in revenue in the quarter, which was up 18% over the prior year. Operating income came in at $6.4 million versus $14.7 million in the prior year. And as we noted in the press release, the current quarter included an operating loss of $4.4 million related to the IGT activities and a $3 million increase in SG&A over historic levels.

EBITDA was $14 million versus $21.1 million in the prior year. Net income $2.9 million, or $0.13 a share, versus $7.1 million, or f$0.48 a share, again both from continuing ops. Discontinued operations in the metals areas, reflecting the changing marketplace, returned $0.05 per share on net income of $800,000, versus a loss of $0.04 a share in the year-ago quarter, with a $600,000 loss.

Reviewing the sales, we commented last quarter that for the first time in more than two years, we had in the quarter ended March positive year-over- year samestore sales. The quarterly pattern last year and last year's June quarter was a negative 10% year over year. The September quarter continued at 10%. The December quarter dropped to a negative 3%. The March quarter improved to a positive 3%. And in the current quarter, same store sales were up 6%.

Our mix continues to follow a pattern where for the year last year, commercial markets delivered 43% of revenue. That's down to 42% in the first quarter. Military was 33% last year, increased to 36% in the first quarter. Regional jets were 6% last year, 7% in the first quarter. Likewise, business jets, which were 8% last year, increased to 9% in the first quarter. And other, which last year was 10 percent, dropped to 7% this year, reflective of the decline in revenue in our IGT markets.

IGT revenue for the year last year was approximately $24 million. The first quarter it declined to $3.8 million or an annualized rate of $15 million.

Turning to our backlog, backlog at the end of the quarter increased to $535 million versus $520 million at the end of last fiscal year, March 31, '04, and up from $486 million at the end of March '03. In that backlog and prioritizing the backlog by program, our top ten programs in backlog value are as follows. Rank ordered, the Triple Seven program remains in first place, followed by the 737 New Generation. The B-22 program is third, 747 fourth. C-17, A-320, F-18, CRJs, 767, and tenth is the F -15 program.

Reviewing revenue in the quarter, there was only one customer that contributed more than 10% of revenue. That was the Boeing Company, which made up 22% of our revenue. That's the combination of all of Boeing's divisions, commercial, military and space.

When we take another cut at where we are generating our revenue, looking at what programs by customer, the Boeing commercial aircraft build programs in the quarter generated 17% of our revenue. That's both direct sales to Boeing and identified direct sales to Boeing suppliers. Likewise, Boeing military and space contributed 12% of the revenue, and our shipments to Airbus on their commercial programs generated 4 percent of revenue.

Turning briefly to the balance sheet, net debt at end of the quarter stood at $206 million. Net debt to capital declined from 30% at the end of last fiscal year March, down to 28%. Cash flow in the quarter from operating activities was a positive $17 million. Capex was $3 million, resulting in a decline in debt of approximately 14 million. Net debt winding up at $206 million, and again, the net debt to capital at 28%.

With those statistics in the background, I will turn it over to Rick. Rick?

Thank you. Good morning, everybody.

If you've had a chance to read the press release, and as the press release said, we are certainly disappointed in the earnings for the quarter. However, as John has indicated, and I am going to go over some of the numbers that John talked about, we remain optimistic and encouraged the way things are going in the business.

Our OEM business is up 10% year over year. Our maintenance repair, or aftermarket business, is up 20%. As John mentioned, our samestore sales are up again another 6% for the second quarter in a row. Our Aerospace Systems group and our Aftermarket Services group are performing very well, with the one exception about which I'll speak in a moment. Our military business is up.

As John mentioned, our debt to capital is down to 28% from the last quarter. Our acquisitions, Triumph Thermal Systems, which was acquired from Parker Aerospace or Parker Hannifin, and Triumph Gear Systems, acquired from Rolls Royce, are performing above expectations and have, in fact, added 12% to our revenue. Our cash-flow was over $17 million, as indicated in the press release.

We have 16 million shares outstanding. You can do the math, I'm not allowed to. Which I consider this cash-flow excellent, especially for the first quarter of our year, which has, in fact, historically been our weakest quarter in regards to cash-flow. It somewhat underlines what we have said for a long period of time, when our business is not as good as we would like it to be, we can, in fact, generate cash.

John also mentioned our backlog is up to $535 million, up sequentially over the last quarter. We do have two areas of concern which were referred to in the press release. First, we had an operating loss of $4.4 million of our industrial gas turbine area.

At the present time it's small solace to us, actually, that the loss was about one-third of that in the last quarter, but our IGT business year over year is off 50%. And we've discussed this issue in the past. It's just not an issue that quickly gets results in the steps that we are taking. The loss does continue to narrow as we consolidate Phoenix operations and realign our business to better serve the IGT Repair and Overhaul business.

Second, we are concerned about expense increases, especially in the healthcare, regulatory and legal areas, as mentioned in the press release. SG&A costs have risen at the operating levels, but that's been somewhat offset by market share increases in both our OEM and aftermarket businesses.

As we mentioned in the press release, our costs have risen approximately $3 million year over year, which excludes SG&A increases at acquired companies. So they are samestore increases, if you will. But some of the cost increases were expected because of our consistent growth in the Company. We've grown, we've had to get more accomplished and we've added personnel to do so.

We've also adding marketing personnel at the companies which I alluded to, which has added market share and will continue to add value. Controlling healthcare costs, I will say, and nobody on the call here is not familiar with healthcare cost challenges, and they will remain a challenge for us going forward.

Our markets are showing strengths, and as the build rate increases, which I see happening in 2005 calendar, and we normalize some of these expected expenses, we expect our results will in fact improve. Last quarter, and on the conference call we made the statement that our quarterly results will improve sequentially, and certainly with this quarter's results, I can very positively say that they will in fact increase sequentially.

We also said that we projected earnings to be in the $1.70 to $1.80 per share level for the year. Considering the disappointing first quarter, I think this range is certainly a challenge as we speak, but on the other hand, certainly not out of reach for the balance of the year with three quarters and with our backlog and the positive things we see happening.

At that I would open it up to any questions.

(Operator instructions) Please stand by for your first question. Ron Epstein of Merrill Lynch.

Good morning.

Good morning.

Could we just walk through some of the cash flow? Because the cash flow was particularly strong in the quarter, just to identify where it came from.

Ron, I'm trying to think of what we can review, based upon the information that's in the press release without having to provide an 8(K) following this call. Let me say the Q will be out the week after next, which will have all the data in it.

I can say that if you turn to the last page in the press release, the reconciliation back to EBITDA, that the EBITDA number is the biggest portion, with fairly stable working capital and a low level of Capex for the net cash flow number at 14.

Okay. And then, kind of walking on to maybe a question about the industry, in general. What do you guys see in the aftermarket, given that most of the suppliers have reported already. We've heard your calendar year over calendar year growth rates anywhere from 7% to 10% in the aftermarket for commercial aerospace. Is that kind of what you guys are seeing?

Well, as I mentioned, Ron, we had numbers in our MRO area, an aftermarket area, that were actually up higher than that. Our MRO Business grew 20 percent, okay?

That's quarter over quarter, right?

That's right. Now, will we in fact maintain 20% in that thing? Probably not.

But I would concur with the growth rates and we frankly hope that our growth rates in that area in the aftermarket would actually will be a little higher than the 7% area year over year. We've made a number of initiatives there in regards to MRO. So I would expect that that would stay in that area, if not a little higher than that.

Okay, and then just one last question. In the area of business jets we've kind of heard kind of across the board that-- that market is coming back, and in some cases, fairly robustly. Is that what you guys are seeing?

We see that-- yes, from certain companies we are getting more inquiries, more orders. There is indication that that build rate is going to increase relatively significantly. I'll also say that it hasn't done that yet.

Okay.

But that's what we are being told also.

And I think sequentially we talked about the increase in-- that a higher level of sales, going from 6% to 7%-- or 8% to 9%, I mean, in business jets. And compared to a year ago in the summer, when you had the outages in production, this year is much stronger.

Sure, sure. Pretty much everybody shut down last summer, right?

Right.

Yeah. Okay. Thanks.

Larry Baker of Legg Mason.

Good morning. Just a couple of questions. On the IGT, I believe previously you had said the cost of closing down the OEM business was going to run about $4 million in the first half, and then you reported a loss of $4 million-plus in the first quarter. What does that look like for the second quarter?

Larry, the $4 million that we talked about was restructuring charges that we expected outside of just the overall operating level. The $4.4 million was essentially the results of operations at the lower level of revenue in those units.

We have yet to physically make the moves to consolidate those entities and incur that $4 million of, quote, "restructuring charges," unquote. So really, the $4.4 million is just an ongoing -- and as Rick mentioned, one-third, approximately one-third of what the loss was in the March quarter.

Larry, we won expect that number from an operating basis to decrease relatively significantly as the year goes by. If you're looking at apples-to-apples on the operating issues.

Okay. Is the $4 million going to be spent and then all focused on the second quarter restructuring?

In evaluating what we are doing, based upon the perspective we had at the end of March, that number may come down in the event that we do not shutter as many facilities as we expected to.

The strategy is more generating more revenue to put through the facilities rather than shrinking capacity. So if anything, that number would be smaller going forward rather than larger.

We are not-- put another way, we are not trying to, because we have a number out there of $4 million, we are not trying to spend that $4 million. We were trying to give some guidance as to what it might cost, but if we go different directions that are better for the Company, we are not going to utilize that $4 million going forward.

Okay. How have you done at filling the facilities? Can you talk about new contracts or revenue flow or--?

I think that the issue-- we do have some new business, we've been awarded some new business, we are talking about some new business. And that's why I'm confident in saying that that loss, you know, will get better sequentially as this year goes by. I'm not necessarily prepared to say that that area of the business is going to be wildly profitable by the end of the year. But I think that the results will get better as we fix some of those problems and right-size the business and realign the business, if you will.

You've got to remember that the biggest challenge here was our large customer that was with us, and we're at a run rate of $40 million to $50 million and overnight you go to a run rate of $4 million or thereabouts. So, you know, it's a challenge but I do see it getting better as the year goes by.

Okay. And then on the SG&A, you said that the $3 million was ahead of the run rate, part of that was a surprise. Can you talk about what part of that was a surprise and what the run rate would look like going forward?

Well, I think that the three areas that we talked about in the press release, number one of which was healthcare. I'm not necessarily going to say that was a total surprise, but I think the magnitude of it was from the perspective of we are continually doing things to keep our healthcare costs in line. And we just had, frankly, a very bad quarter in regards to our healthcare costs throughout our system and our 4,000 employees.

Our legal costs were higher than we had in fact expected, for two reasons. Number one, absolute legal costs; and number two, we had, as you know, a change in legal counsel. And we chose to clean up some of the issues that we had outstanding under past legal counsel and have our new legal counsel start with a clean slate.

So some of that was expected and a conscious decision to do some things. On the other hand some of the legal expenses were not expected, were not planned for.

I guess since you brought up legal, can you comment on the-- I guess it was a patent infringement issue?

I can comment on it and, frankly, what I'm going to do again is quote from a press release we put out. We do believe that we have meritorious defenses to the allegations that are contained in Eaton's complaint. We intend to conduct a vigorous defense and we are considering potential claims against them. I think it would be improper at this point in time to say anything more than that.

Then finally, could you just review the number of the percentage of sales to Boeing commercial in the quarter? I'm sorry, I missed that one.

Yes. The overall sales to Boeing direct, commercial, military and space, were 22 percent of sales. The-- splitting out Boeing commercial, both direct and indirect, was 17 percent of revenue, and that's roughly 50/50, 50 direct and 50.

Okay.

And Boeing military and space programs generated 12%.

Okay. We've seen Boeing, actually twice so far this year, raise their forecast for deliveries for 2005. And Airbus has done the same thing once. On the Boeing side, would those deliveries begin to impact your second half of this year or is that going to be more of an '05 second half deliveries and '05 first half revenues for you?

I think the answer to that is both. I mean, depending on the-- where that business is. In the build-to-print area, it will start to affect us toward the second half of our year.

In the design area, it could hit us sooner than that because it's a little bit longer lead time on some of the engineered products, et cetera, et cetera. But I would expect in the December and March quarter that we would see increases in that area.

And, Larry, I think their statistic -- and I'm trying to recall it here -- the deliveries were 74, 75 in the current quarter by Boeing, which again is at that 300 level where they are projecting higher than that. So, as those delivery rates pick up, that will definitely have an impact on our second half of the year.

Do you guys have a sales forecast for the full year?

Last quarter we said 675 to 700, and that number is still good.

Okay. Thank you.

Robert Stallard of Banc of America.

Good morning. I have just a couple of questions. First, I want to follow up on IGT. You commented that you don't expect it to be wildly profitable by the year end. What sort of level of pick-up does it require in that industry for you to reach a sort of break-even point?

Rob, I think it's not just a matter of the level of pick up, it's right-sizing the company to a certain level which-- so, we are working at it from both ends, if you will.

If you remember, in that area, when we set up, for example, the Precision Casting business, almost 100% of that business was IGT related. Today in the casting business, almost 50% of our sales now is in the aerospace end, in castings we are manufacturing in the aerospace end.

I think that that's part of the issue in regard, we are clearly lowering our break-even point there with reduction of expenses. And we have contracts and business that we are putting in there. I'd have to do a little bit more work, frankly, to give you an absolute number on what the break-even would be there.

But clearly, because you're talking two or three locations and those break evens are different at the different locations. But suffice it to say that I would be disappointed if we weren't at a break-even by the end of the year, maybe even something on the other side.

And, Rob, the strategy, as we've talked about in the past, is to refocus outside of the IGT OEM area. So we are looking at the capacity that we have there, trying to drive higher revenues to the IGT after market, and using those capabilities for both forming, machining and casting high temperature alloys into other markets, primarily into the aerospace markets, and looking to generate revenue to replace the IGT OEM rather than looking for that to recover.

Fine. If you're looking at the IGT after market, how are you finding pricing in that area?

Competitive. There is a lot of capacity chasing a limited amount of business.

Just to change tack and look at the aerospace side of things, a similar sort of question. How are you finding pricing with regard to Airbus, Boeing and also on the aftermarket side?

I think if you looked at our gross margins across our business, we continue to have pressure on that. Our margins year over year are down about 2% from an operating gross profit margin.

I will say that our gross profit dollars are in fact up, which reflects a market share increase. But I think there is still pressure on that issue, especially in the design to-- I mean in the build-to-print area, where there is certainly excess capacity. We are still operating at the 35% to 40% capacity in that area. So there is room to improve that. So I think there's-- the pricing there is, in fact, difficult. But, you know, once again, I think that could ease up with the build rate increases.

Looking at the build rate increases we can foresee on OEM, do you think there could be an impact on your working capital as you get ready for these production increases?

I think, to answer your question directly, yes, there could be an affect on the working capital. It is, frankly, our plan to do a better job of managing our working capital.

As I think we mentioned in the last conference call, we have hired a person from Boeing as manager of process improvement. If you want to read into that, manager of doing better in controlling our inventory, so be it. That's what she is there to do. Very lean oriented, and we expect that our inventory will not grow certainly as much as it has in the past with any increased business we have on the build rate.

That obviously has something to do with the way our major customer base handles some of these things. You know, you have the-- you have the issue of the Airbus and the Boeing pushing inventory down to the supplier base. We have to fight that issue all the time. But it is our intent not to increase our working capital significantly, other than by acquisition, of course.

How much are you able to sort of pass then down the chain to your supplier?

We are, again, we have hired people in the supply management area. And, philosophically, we are trying to do unto others as they are doing unto us.

I would not say that it equals what our customers have done to us. But, on the other hand, we have consolidated our supplier base and are reducing the raw material that we have to have in and having them be just-in -time delivery to us.

That, Rob, is definitely an opportunity for us that we have not fully exploited, but we are focused on.

Just finally, I was wondering if you could comment on the M&A situation, what you are seeing in the pipeline and how you feel about the multiples being currently paid for acquisition?

Well, I don't necessarily feel particularly good about the multiples, because everybody is starting to anticipate that the market is going to be great in 2005, six and seven. I think that the multiples have, as I've seen, might have moved a little bit north.

As you know, in the past we have been very disciplined in prices we have paid. We intend to remain disciplined on the prices we have paid. But we also realize that, with the proper opportunities and the proper growth areas in product lines that we are not in and proprietary products, et cetera, that those prices might move north.

That's great. Thank you very much.

Okay.

Steve Levenson of Advest.

Good morning, Rick and John. Can you give us a little idea how the mix was on the MRO business, the aftermarket business, generally? Is it skewed more to the low-priced, low-fare airlines or to the freight carriers or to the big guys?

Let me, on a qualitative basis, say that the markets remain consistent with what we've described in the past, Steve; that the major trunk carriers in the U.S. are not our core market.

We generate about two-thirds of our revenue in North America, with UPS and Fed Ex both being major customers, Southwest being a major customer, and the low-cost carriers making up the bulk of that North American revenue. And the other third comes on a global basis, with a lot of activity in Asia. Asia is a very strong market for us.

So there really hasn't been any change. The markets that we are in are the markets that are stronger and our revenue continues to come from those same markets.

Okay. Second, it looks like in the defense budget they are calling for 11 B-22 Ospreys. Can you tell us about your content per ships up there and what would you see as the outlook?

No, I can't tell you that, but I can tell you that the B-22 is our third largest program. We acquired a-- we had a significant content on that and we acquired even more significant content when we acquired Rolls Royce Gear Systems, now known as Triumph Gear Systems. It's an important program to us.

We've spoken about the program in the past on conference calls. It's my personal opinion that-- people ask whether it's going to go or not, I just don't see any other choice. Where is the military going to go? They are flying very old technology as it is right now.

Our content on that is significant, and the only reason we don't want to do that is that that changes so precipitously. We are getting more and more content on that particular program, and others. And it's very difficult to let all that information out.

Rather than specifically quantifying it, Steve, if you think that our backlog is $535 million, and on a prioritized basis, the B-22, with the current build rate for product deliverable over the next two years, puts it in third place, it's a significant value on each one of those shift sets.

Well, can you give us an idea then of what you see as the outlook for the build rate? Do you see it continuing at 11 or do you see it going up, based on the sort of order activity you're getting?

Not specifically based on the order activity, but the outlook we have for that program is for production increasing as the airworthiness issues are resolved or no longer come up and procurement is funded at higher levels. So we think that it would be picking up.

Okay. Thanks. Last, out at Farnborough there's a subsidiary of Evergreen that I guess is going to try running a tanker charter service and we understand they've got a fair number of aircraft that are not yet outfitted. Do you have an opportunity there, and maybe you can comment on what you are hearing about the U.S. Air Force tanker program coming up?

Well, first of all the U.S. Air Force tanker program, I think, is still a little bit up in the air. The public issues are that Airbus is looking at that. I have personally a hard time believing that the U.S. government is going to give a defense contract to Airbus, but hopefully that thing will be resolved with Boeing and the DOD. And we are optimistic, because we do have a fair amount of content on the 767.

In regards to the other tankers, we did meet with them at Farnborough. You may or may not know, we used to do the KC-10. and the KC-135 booms. So they had some interest in the projects that we have done in the past. And we are in the process of following that meeting up that we had in Farnborough with those people, and it could be-- it could be something very exciting. I think it's a little bit early to tell, because Farnborough was our first contact with them.

Okay. Thanks very much.

Jay Khetani of S.G. Cowen.

Good morning. Just going back to IGT for a second, if you did about $4 million in sales this quarter, which was up slightly from the fourth quarter, it would say that your cost of sales in that area was about $8 million to get you the $4 million for loss. And so, I'm just trying to put together the pieces to get to a break-even picture by the end of the year. It would require a 50% growth by the end of the year in sales and maybe a 25% reduction in cost of sales. Is that something that's achievable?

You have kind of the plan laid out such that you could trend costs by that much? And I guess the other concern is on the top line growth. My understanding of breaking into the PMA area is that it's somewhat challenging and takes some time. So, could you just help us thing about that?

Sure. First of all, Jay, the facilities that we are talking about, Rick mentioned the casting facility, is now-- which is a change -- is now running a number of aerospace parts for various customers through that facility. So that the top line, again, is not focused on reclaiming the IGT OEM business that has gone away but is continuing to pursue the aftermarket, which continues to grow at a marginal rate.

But more importantly we are looking at the capabilities in those facilities and going out and pursuing revenue outside of the IGT area to drive the top line to the point where cross that break-even point. And using again the capability to form and machine, high temperature alloys and to cast high temperature alloys, but looking at markets other than the IGT OEM market to utilize that capacity.

And the plans are in place, as Rick said, but the objective is to both continue to focus on more efficiency in plants, but to, more importantly, drive the top line to get to that break-even point by year end.

So on balance, it's more revenue growth than trimming that cost of sales to get to the break even?

Yes.

Okay. You talked about 20% year over year growth in aftermarket. Is that organic or is there some Rolls component in there?

That's organic.

Okay. And do you know what it was sequentially?

I don't have that in front of me.

Okay. And then, just lastly on M&A, you had talked last quarter about being somewhat less aggressive, given the operational challenges, and backing off in terms of how quickly you bring in new properties. Is that still the case or are you looking at new properties anew, or where do you stand on that side?

We have two or three companies that we are currently looking at. I would say that I would-- we are still putting some emphasis on control of expenses and growth in market share as to where we are. But on the other hand, we don't necessarily control when the opportunities arise.

So we are in the process of looking at a couple of potentials, some of-- a couple of which are relatively significant -- in size, I'm talking about.

But you do feel different and more comfortable than you did 90 days ago with regards to the existing operation, such that you're willing to take on more?

Absolutely.

Okay. Great. Thank you.

Are there any additional questions? John Rogers of D.A. Davidson.

Good morning.

Good morning, John.

A lot of my questions have been answered, but a couple of things. On the 77, when do you expect to hear on any of those products? We've seen some announcements from others, but I just--

I think that, first of all, we are on some 77 programs already, in partnership with some of the people whose products have been announced already. Namely, in the cargo door assemblies with Saab and we've done some business jointly with Messier-Bugatti. So we are on the 77 from that perspective, and working and partnering with them.

We are hopeful that we will hear on our own. We have a couple that are currently pending and we hope to hear within a relatively short period of time. I mean, as you know, Boeing is moving forward fairly fast with some of the 77 issues and we are hopeful that we will be right there.

Okay. For what you've bid on or negotiated for, have you had any significant losses there yet? In terms of what you weren't able to get?

There are a couple of the smaller projects that we were not, we were not chosen in some of the larger companies. You've got to understand that Triumph moving into this particular arena is a tremendous effort and a very positive issue for our company, because I think that two or three or four years ago, we wouldn't have even been considered for this type of thing. But a lot of work and a lot of effort has gone by and we are just very hopeful that some of our projects come to fruition.

Okay. And then, sorry, just back on the IGT. In terms of the facilities that you have there, can you give us a sense of what your investment or total assets are there now that are dedicated?

I don't have the-- both the-- either the gross assets or the fixed assets in front of me, John. It's-- The casting facility, when we announced that project, we announced that it was approximately a $10 million project.

And the other facilities really were a consolidation of facilities that had been dedicated to the aerospace market, that when the IGT market began to expand in the $2,000 area, we refocused that capacity into that market, added some machinery. But it really was existing facilities. And now we are transitioning back into a new market with those facilities.

In addition to that, it's very hard, when you say dedicated to IGT, that's very hard. As I mentioned before, the casting facility now is doing a significant amount of business in the aerospace area, so-- and it's the same equipment. So it's not necessarily dedicated to IGT. It's part of the transition process that we are trying to affect.

Okay. But I would-- I guess what I'm trying to get a sense of is, I mean, obviously it's substantial losses coming out of there in which, presumably, are going to get better over the next couple of quarters. But if they don't, what sort of investment is at risk there?

The other thing that, John, on samestore sales-- and I'm sorry, I must have had some wrong notes. But can you run through the 2003 sequential quarters again?

Sure. 2003 samestore first quarter is minus ten, September quarter was minus ten, December quarter was minus three. March quarter was plus three, And current quarter was plus six.

Okay. Right. Okay. Great. Thank you.

You're welcome.

Jay Khetani, S.G. Cowen.

A follow up. So the guidance which you're saying you could potentially still reach the $1.70 to $1.80 level in '05, albeit with challenge, would say at the current-- at your sales level would be an 8% operating margin. And so, we are starting at 4% in the fourth year, so that would demand a fairly spectacular ramp through the year. Is that-- what needs to happen in order to get you to the $1.70 level? Presumably, IGT has to get back to break-even. Are there other internal operational moves that you would have to put in place or is it solely end-market growth?

Well, Jay, I think that, number one, we think that the third and fourth quarters will show some increase in the build rate, number one. Number two, what else has to happen is we have to get a little bit, some reduction in our SG&A. It's a-- and that's a challenge, okay?

It's a challenge from the viewpoint of our healthcare costs. We've mentioned certain lawsuits. Those things don't come free. There are issues like that, that I am clearly concerned with. Okay?

I think what I was trying to indicate on the $1.70 to $1.80 is that, based on what we see in the potential build rate and what we see in the market share increase and what we see in the areas outside of the IGT, we have some optimism. Okay? And we have some optimism as to the fact that those sales can continue to increase.

It clearly means that we have to make some inroads and come to a break-even or better as fast as we possibly can in that IGT area. There's no doubt about that. I mean, that's a tremendous drag at the present time.

A very big part of it, Jay, is the leverage we have on incremental volume as build rates pick up. We are operating in the black at 35% to 40% with significant gross margins in that business. As we get incremental business, it's very profitable.

Yes. Okay. Great. Thank you.

John Rogers of D.A. Davidson.

Sorry, one other thing. It's obviously a great time to be in it, but the metals business? Can you give us an update there?

The metals business is discontinued operations, were made up of really two businesses. One being the metals processing and distribution business, and the other being a structural steel erection company. The structural steel business is gone. We've divested that. And the metals business which, a year ago was generating in the quarter a net loss of $600,000, is now generating net income of $800,000.

So the value of the business has changed because of the marketplace change. And we are in multiple discussions with potential acquirers as to how we see the free cash flow stream going forward out of that business and valuing what we think the assets are.

Is it still expected to be gone this--

We are still expecting to sell the business this year, but we are not going to sell it at less than what we perceive the value to be.

Okay. Good. Thank you.

Are there any additional questions? Robert Chicaparo (phonetic) of Merrill Lynch.

Good morning. Could you give us a little bit of detail or just some idea of the-- You said there was some clean-up of past legal issues with your new change in counsel coming in. Is there any way that you can give us some type of feel of the materiality of that number?

Well, it's included--

In the $3 million?

It's included in that $3 million number. And it's-- in the press release, the increases in the costs are rank ordered.

Okay.

Okay? So I think that that's really as far as I'd prefer to go.

Okay.

Individually, there was no major situation in wrapping up the open files.

No, but I mean, just-- was it a third of the, you know-- or that's sort of the type of detail here, just to sort of fish out of here? I mean, ongoing healthcare costs are ongoing, but clean up of past issue costs are sort of a one-time or at least expected not to recur items. So we are just trying to get a better feel of how much that impacted the current period.

Well, as I said, they are rank ordered and they are not equal. So it's less than a third.

Okay. On the OEM business, you said that you were up 10% year to year.

Yes.

Was this the first quarter where you changed over to a positive comp or if not, when did that occur?

I don't have, again, the March quarter was the first quarter in over two years where in total we went plus. I don't have the statistic in front of me with respect to the split. But, again, the March quarter, the aftermarket would have been stronger. I don't know if it was plus on the OE side then or not.

If anything, it was the-- it's the first or second quarter in the last, say, five or six quarters that we can make that statement. Because I'm not really sure-- I don't-- we don't have anything in front of us here that talks about the March quarter.

That's okay, just sort of, you know, was it this quarter or last quarter. Obviously, when the numbers are negative and that's such a big part of your mix, it's fairly easy to see.

And then, finally, not to beat the IGT business and your plans to shrink it to death here, but you know, honestly, was there any impact on your pace of change in that business with the issue that was raised by your auditor in the 10-K?

I would say this. We put a lot of work into that and then the 10-Q will come out in a couple of weeks and you'll read about that. So, we've put a lot of effort into that particular issue and a tremendous amount of positive work has been done in that area.

On the other hand, it's sort of naive to think that maybe some of the operational issues didn't suffer, but it was our intention not to have the operational issues and the realignment and reinventing, if you will, of the business, to take a back seat. I think it probably did suffer to some extent because of that, because that's a natural progression of things.

But generally speaking, our operating people have been addressing the issues independently of the issues we had to face and fix in the other areas.

Okay. Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2005 first quarter earnings conference call. A replay will be available July 30 at 11:30 a.m. until August 6. To reach the replay toll free, the number is (888) 266-2081 or (703) 925-2533. The replay code is 516978.

Thank you all for participating and have a nice day. All parties may disconnect now.